A lot goes into managing one’s finances. Missteps can result in everything from missed opportunities to penalties that must be paid. Here are seven tips to help you manage your money.
Think Long Term When Planning for Social Security
If you are approaching retirement in the next 5 to 10 years, you’ve probably given some thought to Social Security. There are several important decisions to make about when to start claiming your benefits, and your EKS advisor can run the numbers with you.
One important consideration if you are married is to make the best long-term plan for the two of you. Don’t look at the process as two individuals making decisions independently. Instead, you’ll want to coordinate it because it will impact the surviving spouse’s benefits when one spouse dies. In most cases, a widow or widower is entitled to the larger amount that either of you was collecting.
So, if health and finances permit, it may be best to defer collecting benefits of the person who has the larger Social Security payout until at least Full Retirement Age (FRA), and maybe even until age 70. FRA is now 66 years and two months for people born in 1955 and will gradually rise to 67 years for those born in 1960 or later. Early retirement benefits will continue to be available at age 62, but they are significantly reduced.
There are advantages and disadvantages to collecting Social Security early, collecting at FRA, or delaying Social Security until age 70. One size does not fit all. Speak with your advisor to determine which strategy is best for you.
Understanding how you will pay for everything once you stop working is an essential first step in retirement planning. Read our two-part series that discusses six different ways to pay for retirement (Social Security is only one way).
Don’t Run Afoul of Retirement Plan Rules
You know the advice: sock away as much money as possible into 401(k), IRA, and Roth IRA plans, especially if, in the case of a 401(k), you get a matching contribution from your employer (free money!).
To be eligible to contribute, you must have earned income (i.e., wages and bonuses). Be careful how much you contribute to these plans. Putting too much away in any given year can result in significant penalties.
For IRAs, the annual contribution limit in 2021 is the lesser of your earned income or $6,000 ($7,000 if you are age 50 or older).
The contribution limit for 401(k) plans is $19,500 ($26,500 if you are age 50 or older).
If you discover that you have contributed too much, you can withdraw the excess funds. If done timely, you can avoid a penalty. But failure to do so will result in annual penalties until you correct the problem.
The good news is most 401(k) plan providers will not allow you to over contribute as there are safeguards in place to prevent this. But, if you changed jobs during the year and contributed to both plans, your new 401(k) plan provider will not know how much you contributed to your old plan in that same year. This scenario could result in excess contributions.
Likewise, for IRAs and Roth IRAs, most custodians will not allow you to contribute too much. But the custodian will not know whether you are eligible in the first place (because you do not have earned income or have too much), so care needs to be taken to ensure you are contributing the correct amount.
Don’t Ignore Your Tax Obligations in Retirement
Just because you are no longer earning a paycheck doesn’t mean that taxes go away. Capital gains on the sale of investments, dividends, Social Security payments, interest income, pensions, retirement plan distributions, and other income are still taxable. According to the Center for Retirement Research at Boston College, people in the top twenty percent of income will pay 11% income tax on average. For the top five percent, the tax burden goes up to 16%, and for the top one percent, it’s 23%. The bottom line is that your nest egg might be quite substantial, but not all of it belongs to you.
Paying your tax obligations once you stop working full-time is not as easy as it may have been when you were working. When your salary generates most of your taxable income, taxes are typically withheld automatically from your paycheck. Once retired, it is up to you to set aside a sufficient amount of taxes during the year for your remaining income. You can elect to have taxes withheld from some of the different types of income mentioned above, but you may also need to make quarterly estimated tax payments to help make up the difference.
While taxes may be here to stay, the following are other ways to reduce expenses in retirement and best manage your money.
Don’t Let Vampire Appliances Suck You Dry
The average American household spends more than $1,400 a year on electricity, and 10% to 20% of that comes from appliances and electronics that are not in use. These so-called vampire appliances use electricity even when idle, wasting power and running up your bill simultaneously. That includes every phone charger, television, printer, toaster, or toothbrush charger. Televisions and video game consoles are the biggest culprits. They are leeching energy, even when they are in sleep or standby mode, constantly drawing small amounts of power.
In our modern, plugged-in world, it’s not realistic to unplug every time you stop using something. Here are a few ideas to help the world and save some money in the process:
- Buy appliances that carry the Energy Star label (especially the refrigerator)
- Use power strips to shut off more than one plug-in at a time
- Unplug your phone and other devices once they are fully charged
Read our two-part series that discusses how each of us can contribute to the effort to save our planet while saving (and earning) you money and educating your family members.
Saving the Planet, One Step (and One Investment) at a Time discusses how you can incorporate a socially conscious style of investing into your investment portfolio.
Small Steps Can Have a Big Impact shares ideas for what you can do inside your daily lives.
Evaluate Memberships and Subscriptions
Through the years, you have likely joined dozens of organizations and subscribed to a myriad of services. Now is the time to reassess what you are paying monthly and annually and determine if the services remain relevant.
For example, do you read all the print magazines you receive, or do they collect dust on your coffee table? Did you activate any free trials that you forgot to cancel, resulting in fees for services you rarely use? Do you subscribe to any digital news services or streaming services that you don’t watch anymore? If so, reduce your expenses by canceling them.
Another membership that often goes to waste is the neighborhood gym, which might be becoming an endangered species. While many people rushed back in when the doors reopened during the pandemic, many others decided to find alternative ways to work out. Home gyms and online exercise programs have exploded in popularity. Many programs are free, and all can be done in the comfort of your home or neighborhood with minimal equipment.
Cut the Cord!
The cost of cable television keeps going up while the number of channels we tend to watch goes down. There are so many alternatives today, such as Netflix, Amazon Prime, and Youtube TV, to name just a few. These services likely replace some, if not all, the channels you enjoy watching. These services can be a fraction of the cost of cable TV, and some of them offer additional benefits (such as Amazon Prime’s two-day shipping benefit).
If you can’t live without your cable TV, maybe you can live without a home phone number (landline). So many people rely solely on their cell phones but never think to cancel their home phone numbers. Doing so can reduce your monthly costs, as well.
Use Those Credit Card Points
According to a study done in 2017 by Bankrate.com, 31% of credit cardholders have never redeemed their credit card rewards. Cards offering cash back rewards or gift cards can help reduce entertaining and travel costs and be pretty substantial.
Along the same lines as credit card points are discount codes used when shopping online. If you spend any time listening to the radio, you will hear promotions for items such as flower delivery, clothes, and other merchandise. These discounts can add up as well, saving you money.
These are just a few ways to cut costs and help you manage your finances as you near retirement and while retired.